U.S. markets closed higher on Friday and to end the month of September with the S&P 500, Nasdaq, and the Russell trading to fresh all-time highs. The Dow closed within 14 points of its lifetime peak, thanks in part to the Transports ($TRAN), which also reached a lifetime high after closing above the 9,900 level.
The major averages finished the month higher by 4%-5% with the Russell 2000 up 6%. Technology, Health Care, and Financials were the month’s leaders while Utilities, Consumer Staples, and Energy were the only laggards.
The start of Q3 earnings season doesn’t “officially” begin until the second week of October and when the big banks start coming out with quarterly results. However, there have been 16 S&P 500 members that have reported quarterly results over the past two weeks. This week, another 20 companies are on deck to report results, including 7 S&P 500 members.
Total Q3 earnings are expected to be up 3.2% versus the year ago period on 5% higher revenues. However, it is important to note estimates for Q3 came down as the quarter unfolded, with the current 3.2% growth down from 6.3% at the end of June.
As far as sector growth in Q3, the Energy sector should benefit the most from easy comparisons. Excluding Energy, the aggregate growth pace drops to 1.4% from 3.2%. Construction and Conglomerates are the only other sectors with double-digit growth rates.
Earnings growth is also strong for the Technology sector, with total earnings expected to be up 9.7% on 6.7% higher revenues.
Global Economy – European markets closed higher across the board on Friday following upbeat economic reports. Germany’s DAX 30 jumped 1% while France’s CAC 40 and UK’s FTSE 100 advanced 0.7%. The Stoxx Europe 600 was higher by 0.5% and the Belgium20 climbed 0.4%.
The German September unemployment change fell 23,000 to 2.506 million, stronger than expectations for a decline of 5,000. The September unemployment rate unexpectedly fell 0.1 to 5.6%, stronger than expectations for no change at 5.7%.
The Eurozone September CPI estimate rose 1.5% year-over-year and slightly below expectations of 1.6%. The September core CPI rose 1.1% year-over-year, versus expectations of 1.2%.
Asian markets were mostly higher with China’s Shanghai index adding 0.3%, and ahead of next week’s Golden Week holidays, which will close the Chinese markets for the entire week. South Korea’s Kospi surged 0.9% and Hong Kong’s Hang Seng Index was higher by 0.5%. Australia’s S&P/ASX 200 gained 0.2% while Japan’s Nikkei slipped 6 points, or 0.03%.
The Japan August jobless rate was unchanged at 2.8%, matching expectations. The August job-to-applicant ratio was unchanged at 1.52, weaker than expectations for a gain of 0.01 to 1.53.
Japan’s August national CPI rose 0.7% year-over-year, topping expectations of 0.6%.
Japan’s August industrial production rose 2.1% month-over-month, stronger than expectations for a gain of 1.8%.
U.S. consumer sentiment fell 1.7 points to 95.1 in the final reading from the University of Michigan survey. Expectations were for a reading of 95.3.
Chicago PMI surged 6.3 points to 65.2 in September. It was the second highest reading since November 2014 and represented the 19th consecutive month above the 50 expansion/contraction threshold.
U.S. August income rose 0.2% with a 3.6% August savings rate. Analysts still expect Q3 GDP growth of 3% after a 3.1% clip in Q2, with real Q3 consumption growth of 1.6% (was 1.5%) following a 3.3% Q2 print.
U.S. personal income rose 0.2% in August, with spending up 0.1%.
Market Sentiment – Philadelphia Federal Reserve Bank President Patrick Harker said labor markets feel really tight and are starting to see some upward wage pressure, while the devastation from the hurricanes will have transitory effects on the economy.
He said Fed rate hikes are appropriate, while anticipating one in December and three more next year. He predicts that the Fed may end up with a balance sheet of $2.5 trillion, but will know the right size when it sees it.
Fed speak will be heavy this week with Janet Yellen speaking again on Wednesday. Other Fed speakers include Kaplan on Monday and Governor Powell on Tuesday. Dudley, Powell, Williams, Harker and George will be speaking on Thursday with Bostic, Dudley, Kaplan and Bullard in the spotlight on Friday.
The iShares 20+ Year Treasury Bond ETF (TLT) rebounded on Friday after trading to a high of $125.03. Lower resistance at $124.75-$125 held with additional hurdles at $125.50-$126 and a flattening 50-day moving average.
Short-term support remains at $124-$123.75 with a move below the latter being a bearish development. RSI is above 40 and is starting to curl higher after holding July support levels.
Market Analysis- The Russell 2000 ETF (IWM) tested an all-time intraday peak of $148.43 with fresh resistance now at $148.50-$150 on continued momentum.
We mentioned there could be a strong breakout if $144 and prior resistance from July was cleared but RSI could be peaking in the low 80’s and levels that held last November and December. Short-term support is at $148-$147.50 with a move below $145 likely signaling a short-term top.
The Dow Jones Transportation Average ($TRAN) closed at an all-time high following Friday’s run to 9,934. Continued closes above the 9,900 level keeps fresh resistance at 10,000 firmly in play. Rising support is at 9,850-9,800 with a move below 9,750 signaling a short-term top.
RSI is in slightly overbought territory and is currently in the high 70’s. However, RSI stayed above the 70 level throughout last November and into December while peaking in the high 80’s.
The percentage of Nasdaq 100 stocks trading above the 50-day moving average is currently at 58% and appears to be building a base above the 55% level. Continued closes above the 60% level would be a slightly bullish signal for a return towards the 65%-70% levels.
The latter represents the early September highs. A move below the 50% level would signal some selling pressure coming back into the Nasdaq 100. Some of the big-cap momentum stocks pulled back in September to hold this number down and will be the key going forward to see if they can regain momentum.
All the best,